Four DON’Ts and a Bomb

If Tom Brown of bankstocks.com is right (big if, click here), it should be selling for about triple the current price.

DON’T SELL YOUR HAPNW

Fred: ‘Could you make some additional comments about the HAPN warrants? The warrants are at 36 cents and the underlying security is at $5.87. So aren’t we paying 36 cents to buy a security with an immediate 87 cent gain? This is like shooting fish in a barrel! Or is there some concern that the deal will not go through?’

☞ Let me tell you how to shoot fish in a barrel: Buy a barrel, fill it with water and fish – or at least fish – aim and fire. Even that’s not so great, because you will surely destroy the barrel and, likely, the floor. (Best to do this outside.) But my point is: you will not find barrels of fish on Wall Street. A simple piece of grilled Dover sole, by the time you’ve had a glass of wine, some berries, tax and tip, will set you back $50 easy. (Guys, I need hardly mention, do not eat this way. Guys have Whoppers.) There is no free lunch on Wall Street. Am I straying from the metaphor?

In the first place, yes, no deal may get done. Second, once a deal is done, you have to wait four months before you can exercise the warrants. And, third, who knows what a terrible deal this may turn out to be and how low the stock will drop? So ‘tails’ (we’ll get to heads in a second) you lose every penny of the $3,000 (say) you paid to buy 8,000 warrants. Fortunately, you knew to place this bet only with money you absolutely could afford to lose, so you’re philosophical about it – and you get to lower your taxable income by $3,000, making your after-tax loss only $2,000. (For the sake of this example, you are in the 33% marginal tax bracket.)

Heads, on the other hand, the deal gets done, the stock does nicely over the four years the warrants have to run, and, when it hits $11, you exercise (buying the stock at $5 and selling it at $11), turning each 36-cent warrant into a $5.64 lightly-taxed long-term capital gain -$38,000 or so after tax.

Unlike a heads-or-tails coin toss, there are more than two outcomes. (Here’s a third: the deal gets done but the stock is just $5.36 when you go to exercise your warrants -you break even.)

And unlike a coin toss, the odds are not easily quantifiable.

My gut tells me the odds of the stock hitting $11 in four years are better than 1 in 19. And yet, using this example (which I picked out of the air; there is no special significance to $11), you do 19 times better, after tax, if the coin comes up heads than if it comes up tails.

So I’m in – but only with money I can truly afford to lose.

DON’T GO TO GIBRALTAR

David Plumb: ‘So, are you going to the Borealis Annual meeting in Gibraltar on June 27, or voting your proxies?’

☞ You’re joking, right? (But, sure, it’s fine to send in the proxies and vote with management.) Apparently, they plan to webcast the meeting. Just head over to the Borealis site a day or two beforehand for details.

DON’T SPEND A LOT OF TIME WANDERING AROUND VANCOUVER LOOKING FOR THE STOCK EXCHANGE

Steve Baker: ‘For your information the Toronto Stock Exchange bought the Vancouver Stock Exchange about 5 to 6 years ago and promptly changed its name to the TSE VENTURE Exchange. [Which accounts for your confusion over the ‘V’ in the AXI-V symbol.] While there have always been more than some problems with the exchange, especially in the junior mining area, it should also be noted that it has always acted as a true junior exchange and usually in any given year 10-15+ companies graduate from the Venture exchange to full blown listings on the TSE. In some years more than 30 companies have migrated to other exchanges (either Montreal or Toronto).’

GAYS IN – THE ENEMY’S – MILITARY

I suppose you saw this about preliminary interest in building a gay bomb. The ultimate ‘make love, not war’ tactic, I guess. I don’t imagine anyone actually took it seriously, but apparently it did get run up the flagpole.